Thursday, August 25, 2011

Like it or not the reality is that there are racial differences in political opinions. I was listening to the radio and the commentator said that blacks and Hispanics were conservative but voted liberal and was wondering why. Both groups have higher percentages of regular church goers than whites but vote democratic. Whites on the other hand mostly vote Republican in national elections. Bob Beckel once remarked that the Democrats lost the white male vote in the Goldwater election and have slipped ever since. Given the high percentage of church goers I wondered how blacks and Hispanics could support a party whose leaders routinely trashed religion and actively seek to minimize it in America. So I was wondering whether blacks and Hispanics were truly conservative but thought it was in their best interests to vote democratic? The best site I know for looking at the answers is the Pew Research Center (pewresearch.org). I looked at the support for the hot button issues of abortion, gun control, gay marriage and immigration. Here is what I found from Pew Research Center polls taken in 2009.
Support for:
Abortion
White 47%
Black 50
Hispanic 39
Naturally I presumed that the lesser Hispanic support was because of Catholicism.
Ban Handguns:
White 38%
Black 64
Hispanic 61
I was stunned. I grew up in the deep south and every black adult I knew had guns. Basically the attitude was that protection was needed because the local law enforcement people would not. It would seem that blacks and Hispanics not whites would be the ones most in favor of handguns.
Gay Marriage:
White 39%
Black 26
Hispanic 45
Again I was stunned, not because of the low black support because homosexuality is still widely stigmatized in black communities but because of the high Hispanic support and their catholic faith.
Support for the Arizona immigration law:
White 72%
Black 42
Hispanic 27
Again I was stunned, but this time by the black percentage. Since illegal immigration has been touted as a vehicle for job loss for blacks, it would seem that blacks would favor more restrictive immigration laws.
Well back to the question: are blacks and Hispanics conservatives. The results from Pew indicate that they are not. Indeed, there are black and Hispanic conservatives but apparently their percentages equal those of white male liberals.

Tuesday, August 23, 2011

What an amazing year! We have seen turmoil in Yemen, Iran, Algeria, Bahrain, Tunisia, Qatar, Syria, Egypt, Lebanon, Sudan, Morocco, Oman, Mauritania and Libya. Did I leave out any? The despots in the Middle East and Africa have probably not had a worse year. Naturally, the question is "when will China blow up"? Consider the following: everywhere in the world, the Chinese are capitalists. They are the entrepreneurs, the shop keepers, the bankers, the merchant class all over the world - except mainland China. In their native homeland, the communist government is practicing fascism - big government and big business and has allowed only limited entrepreneurship among the masses. If you think the Chinese economic engine is mighty now, imagine what it would be if the Chinese people's freedom to invest, to choose, to own property were unleashed? But right now, Chinese mightiness is vastly overstated and overrated. Consider that now domestic consumption is only a pitiful 35 percent of GDP. That emphasis on exports while surpressing imports is an historically failed strategy. It harkens back to mercantilism which was derided by Adam Smith in 1776 as lowering the economic well being of the British people. The same is true today. With the Chinese so dependent upon exports, the slowdown in the world economies is leading to a sharp decline in Chinese growth. Chinese well being has not been appreciably affected by its economic growth. The Chinese poor and its rural population have benefited hardly at all. At home, Obama fuels class envy. The same is doubly true in China where there is real discord between the poor majority toward the nonpoor and the well to do bureaucrats. China's problems have been compounded by the anger of its people over its staggering losses on its holdings of US Treasurys and other foreign assets estimated to be over $3 trillion. Add to this the growing threat of inflation and revaluation of the yuan. All this means that the Chinese are in real trouble. Jealousy and envy among its people, a faltering economy, authoritarian leadership, lack of democracy and a myriad of troubles point to the inevitable - a collapse of the Chinese economy and a revolt of its amongst its people that will make the upheavals in Africa and the Middle East look like little leaguers.

Isn't it interesting that usually the press accords someone with degrees from Harvard and Yale with intelligence - unless his name is George Bush? I am old enough to remember the emergence of Jimmy Carter on the national scene. He was trumpeted as being perhaps the most intelligent candidate for president since Woodrow Wilson. Indeed, he went to the US Naval Academy and was a nuclear engineer. Consider that he is also a Nobel laureate, a professor, best selling author, humanitarian and farmer, it is difficult to quarrel with Carter being an accomplished individual. The Christian Science Monitor has gone as far as saying that “Carter was one of the most brilliant presidents we have ever had”. I am not going to dispute that. One evidence of the truth of the statement was that he appointed me to run the National Credit Union Administration. However, all that brilliance and intelligence did not translate into a successful presidency. Carter was plagued by the Iranian hostage crisis and skyrocketing energy prices. He gave the impression that he could not make a tough decision. The usually fawning Washington Post ran a Herblock cartoon with Carter and his senior advisor Hamilton Jordan walking into a room full of the polls with Carter saying “Let’s go see what our policies are today”. The pundits concocted a misery index. The economy was in sad shape and there was a “crisis of confidence”. Carter famous “malaise” speech said:

“I want to talk to you right now about a fundamental threat to American democracy. . . . I do not refer to the outward strength of America, a nation that is at peace tonight everywhere in the world, with unmatched economic power and military might. The threat is nearly invisible in ordinary ways. It is a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation. . . .In a nation that was proud of hard work, strong families, close-knit communities, and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we've discovered that owning things and consuming things does not satisfy our longing for meaning. . . .I'm asking you for your good and for your nation's security to take no unnecessary trips, to use carpools or public transportation whenever you can, to park your car one extra day per week, to obey the speed limit, and to set your thermostats to save fuel... I have seen the strength of America in the inexhaustible resources of our people. In the days to come, let us renew that strength in the struggle for an energy-secure nation.”

Isn’t it stunning how this speech – with the exception of the reference to God – could have come from the mouth of our current intelligent, brilliant president – Barack Obama?

All my students know Harold Black's First Law: "Any law worth being circumvented will be". Evidence confirming the law abound. Indeed, it is harder to find disconfirming evidence. Consider the impact that regulators have had on community banks. Everyone knows that regulators always over-react. Rightly or wrongly the regulators were castigated for their perceived lack of regulatory oversight prior to the great recession. As a consequence, they have over compensated. The community banks are now faced with the regulators looking over their shoulders and micro managing. Since hardly any regulator has any experience actually running a financial institution, it is not surprising that they are mucking things up and actually working counter to any economic recovery. When lending should be encouraged it is being discouraged. Recently Main Street Bank of Kingwood, Texas has announced that it is giving up its charter and reorganizing as a pure small business lender. Community bankers tell me that every loan is closely scrutinized - so those loans that the banker would normally make based on experience, will not be made because the regulator does not understand the customer. Regulators are also telling bankers to raise capital even in cases in which loan losses are low. Regulators are demanding changes in portfolio balance based on what might happen rather than what is likely to happen. So many bankers are saying "take this bank and shove it". However, they have to get permission to quit with regulatory approval. The bankers who are quitting are not really giving up banking. Rather they are giving up being a bank. There are other institutions that perform banking functions without having to get a bank charter and have no banking regulator oversight (finance company, REITs and a mortgage banking company are examples). These institutions can't take deposits. Rather they borrow the money to fund their portfolios. So Main Street's bankers who got tired of trying to bank under the thumb of the regulators can quit and organize a bank-like firm and do what they do best - banking.

One of the things taught in finance classes is that markets are rational. The markets, students are told, price stocks based on their estimate of future earnings. News does not move markets unless the news is unanticipated for markets have already incorporated news that was expected. Students are also taught that markets are informationally efficient but there are degrees of efficiency. Weak form efficiency is when stock prices reflect only past information. Semi-strong efficiency is when stock prices reflect publicly available information. Strong market efficiency is when markets know all information both public and private. There is evidence that all have some truth associated with them - yes even strong market efficiency. However, recent events belie all notions of market efficiency. The markets move on reports of unemployment, inflation, consumer sentiment, oil prices, riots in Tunisia, Greek debt, French banks, if the Fed might announce easing or if the Fed does nothing. None of this can remotely be considered rational - especially in light that every knows the economic numbers will be revised. It is also interesting that the revisions do not move markets even though the initial numbers are always wrong. Consider last week when the Fed announced no policy change. The Dow fell by 200 points. Then when the statement was scrutinized, the word went out that the Fed had actually said that while it anticipated no change, that it had discussed the use of a wide range of tools. The markets immediately rebounded by 500 points. Such actions by professionals can only be described as irrational and put a lie to all that finance professors teach. Maybe its time to admit that the markets have a herd mentality and all those traders simply don't have a clue. By the way, most make their money by trading and not by the profitability of their actions. So just keep that in mind. Brokers get paid by the trade regardless of whether the stock goes up or down so if you are out there churning your stock along with all those professionals, your net return will be lower than if you simply bought and held. Its time for all to re-read Burton Malkiel's Random Walk Down Wall Street.

I have essentially been away for a couple of weeks (at the Outer Banks working on my tan). I did not read a newspaper, nor looked at the news, nor did anything on the internet. When I got back I learned that the stock market has some wild swings - although it was almost at the same level as when I left. The Libyans had Qaddaffi on the run, Warren Buffett feels guilty about his tax payments, and the president has decided to run for re-election by bashing the Congress. First, I do not pay any attention whatsoever to the daily movements of the market. Since I am a long term investor, I care about trends and only look at what the market is doing quarterly. This day to day stuff can drive you crazy. It was shameful how the financial networks were milking the swings, actually saying that retirees should be worried about their 401Ks. Well if those accounts are not properly diversified then there should be concerned but otherwise - no. Second, I am certain that the administration's PR machine will tout the stance Obama took on Libya in supporting the NATO effort despite the criticism from Republicans for circumventing the War Powers Act. I guess this will be elevated to the "I got Usama" level. Third, there is already a mechanism in place for Buffett to send his guilt money to the IRS. However, in general if he is espousing raising the tax on the wealthy, he should know that there is not enough money there to make a serious dent in the deficit. Also, if the result will be to tax entrepreneurs and job creators, the result will be perverse. History tells us that when you raise the tax rates of upper incomes, you get less tax revenue. If you want to drive the high earners to shelters and off shore, then this is the ticket. Lastly, I am absolutely convinced that this president and his staff are tone deaf. Blaming the republicans in congress for the failures of this administration assumes that the voters forgot that Obama and the democrats had bullet proof margins in both houses of congress. Obama got health care "reform", Dodd-Frank, and everything else except Cap and trade (so he told the EPA to enforce it instead). His minions enacted the left's "progressive" agenda in all of the cabinets and agencies without a single republican vote. He surely can't be serious. Speaking of tone deaf, I have written before that this is a president that enjoys the trappings of the office but not the job. All the golf, parties, fund raisers and toney vacations speak to this juxtaposed to the lackluster leadership in the office of the president. What genius advised the president to go on a bus tour right after the Iowa caucuses in Darth Vader's bus? And what genius said take your vacation at the playground of the rich and famous during a time of perceived crisis, down economic times and general bad news? I would have advised the president to go to Dollywood or to Branson. Think of the power of those optics! I can't imagine Pat Caddell or Dick Morris or Bob Beckel advising any of this nonsense. The president seems clueless but perhaps he knows that unlike his predecessor, the media is going to be silent. But just ask yourself: what do you think the reaction would be if George Bush had done exactly the same things?

Friday, August 12, 2011

What is the commercial about with the guy dancing in Grand Central Station while everyone is standing around in trench coats?

Aren’t you irritated by the commercial with those guys wearing raw meat being chased by wild animals?

How about the commercial that asks if you are going scuba diving, which razor will you chose? The answer of course is “neither”.

I hate all AXE commercials – without exception.

What about that awful Dairy Queen commercial with poor Mary Lou Retton inside a pinata?

I cheer for sasquatch in all those beef jerky commercials.

I can prove that jerky is not food. I was given some and after trying unsuccessfully to break it down by chewing, gave it to my dogs. They wouldn't eat it either.

It must be hell being in a generation where the main talent to “sing” is cursing and the main talent to “act” is the ability to scream.

Why are all the dems quoting Reagan? Reagan’s Morning in America has become Obama’s Mourning in America.

I kid you not. The electric “Smart” car model is called the ED.

Michele Obama is touting a change in diet to counter obesity in kids while eating cheeseburgers. Has anyone tried to link obesity to this generation sitting at computers all day playing games or tweeting on their smart phones rather than being outside playing?

I trace the decline in America to my grandson’s not knowing what division in which the Atlanta Braves play.

I saw a poll in which 72% said the country was going in the wrong direction, 12% said that it was going in the right direction and the rest didn't know. What dimension are those 28% living in?

Isn’t it interesting that no one has called the rioting in Britain a race riot?

Kudos to Philadelphia’s mayor for telling kids to pull up their pants, cut their hair, eschew tattoos and maybe they can get a job.

I just got my first social security check. I am now officially an old man.

Sunday, August 7, 2011

As it now stands the proposed balanced budget amendment is a mess and if enacted will create a mess that will lead to its repeal. Do I hear prohibition?
1. The proposal is that federal expenditures for the fiscal year not exceed revenues.
2. Federal spending is capped at 18 percent of GDP
3. The president must submit a balanced budget to congress each fiscal year
4. Taxes cannot be increased to balance a budget unless approved by three fourths of both houses of congress.
5. The provisions can be waived if approved by a three fourths vote of both houses.

Here are some immediate concerns:
1. How are the revenues determined? If it is based on a projection by CBO then since CBO usually gives scenarios such as “most likely” and “least likely” which is chosen? Also, economists predicting anything have a worse track record than weathermen. Wouldn’t it make more sense to base expenditures on the previous year’s revenues?
2. What happens if the budget is not balanced? Do the courts then step in to enforce the amendment? Do you really want judges involved?
3. I thought the constitution put the power of submitting a budget in the house of representatives? Why should the president be given the responsibility? The office of the president is probably the least able choice to submit a budget. What happens to all the congressional committees charged with deciding on the detailed line by line expenditures to each federal agency? It seems to me that the proposal should say that the congress must submit the balanced budget.
4. What happens if the president refuses to submit a budget? Is this an impeachable offense?
5. What happens if the congress refuses to accept the president's budget?
6. Although most of us agree that spending must be controlled, a limitation of 18 percent would be sufficient in and of itself. There are estimates that show that a cap of 18 percent would balance the budget all by itself in 10 years.
7. Lastly, as I have written before, the debt ceiling is an effective limiter of federal spending if it is adhered to. So why not simply make a raising of the debt ceiling subject to the three fourths majority?

Standard and Poor's just downgraded the US from AAA to AA+. Who is to blame? First off, everyone is blaming everyone else. Obama is blaming Bush. No surprise since he blames Bush for everything. The Democrats are blaming the Tea Party. Huh? Yes they are blaming the Tea Party for creating the environment in which the president could not get his wish for a "clean" raising of the debt ceiling which would have raised the ceiling by $2.4 trillion with promised cuts in spending! These people are lunatics since the downgrade occurred because spending is out of control and would have been made worse if Obama had gotten his way and were there not a Tea Party. The Republicans are blaming the democrats for their lavish increase in spending, forgetting that this mess started with Bush's embracing of TARP. I guess the independents are blaming anyone who is not an independent forgetting that they are the ones who elected all the congresses and presidents in the first place. So the answer is simple: everyone is to blame except the Tea Party. The reason for the Tea Party's existence is out of control federal spending. However, until enough voters get the religion we apparently are going to continue on our profligate ways. Did I hear "Japan" anyone? By the way, Japan's bonds are probably the riskiest on the planet for developed countries, yet they are also rated AA (as is China - the least riskiest). Everyone is acting as if they know that the downgrade means and what effect it will have. In reality no one has a clue. First it assumes that the downgrade somehow caught everyone by surprise. Go figure. Only if there was a surprise would there be a market reaction. But unlike Nolan Ryan's fastball, we all saw this coming. So the markets should have already adjusted. Nevertheless, the link between the Treasury bond market and the stock market is tenuous at best. Moreover, no one knows the impact on Treasury yields although the folks at Fox seem to think that rates on everything for everyone will go up. Au contraire. In the face of an anticipated downgrade, rates on long term Treasurys last week actually fell as investors sought save havens from the European debacle. Say what you will, the dollar is still a lot safer than most world currencies. I suspect that given what is happening in the eurozone that Treasury bond rates will not rise dramatically. Bond markets are still going to be determined by the fundamentals of inflation and economic growth. Rising rates of inflation and continued lagging economic growth will ultimately cause Treasurys to rise and not any downgrade by S&P.

Tuesday, August 2, 2011

In the recent debate and resolution of the debt crisis, it seems that all sides have declared victory. How is this possible? Naturally, if all the big spenders are not harping then we all should be suspicious. The deal raises the debt ceiling by a whopping $2 trillion while cutting spending by the same amount. Some intriguing questions arise. First, two trillion dollars seems like a lot. The reason the debt ceiling was reached was that in this fiscal year, the amount remaining to be spent out of appropriations would have required the Treasury borrowing in excess of the debt ceiling. That amount is not $2 trillion but a number far less. The question is why didn’t the debt ceiling rise by just that amount? The answer is that the spending is slated to increase by larger amounts over the next two years and the congress did not want to revisit the issue at the start of the next fiscal year. Second, if the borrowing authority increased by $2 trillion and spending was “cut” by $2 trillion, then doesn’t that create considerable slack between the ceiling and the actual debt? The answer is no. The major sources of the increase in spending are in social security and medicare. Those have not been addressed. Third, the enormous increase in spending over the past four years have been baked into the cake and are part of the base. If that spending were temporary, then at least $2 trillion would have gone away meaning there would have been no crisis. That the politicians allowed $2 trillion to be put into the base line is obscene. Fourth, all of the hand wringing is just another charade. Remember when we had that “crisis” last year that forced Obama to prolong the Bush tax cuts and “cut” $300 billion in spending? As I pointed out then, $300 billion is a rounding error. The same can be said for the $900 billion in “cuts” that are to occur immediately and the $1.5 billion in “cuts” that are supposed to come later. If these were truly cuts, then the debt ceiling would have only had to be raised by the amount necessary to get through the fiscal year - a much smaller amount.In reality, despite the rise in the debt ceiling and the supposed "cuts", US debt is still projected to rise by $7 trillion over the next decade instead of rising by $9 trillion. We have been had.

About Me

Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com